The European Union’s (EU’s) proposed ‘unshell’ directive, also referred to as ATAD 3, is looking more likely not to be adopted in its current updated from in the face of opposition from some Member States.
The draft directive was published in December 2021 as a means of deterring the use of shell companies to avoid tax. It imposes minimum substance requirements for EU-based holding companies and specifies punitive action against those that do not meet the threshold requirements. It was originally scheduled for adoption by July 2023 and implementation in January 2024, but Member States have not reached agreement on the substance criteria or ‘gateways’. Other sensitive points are the tax consequences of being designated a shell entity and the information reporting obligations for companies.
It was debated at the Council of the European Union several times in early 2023, with various partial and complete compromise texts being drafted to move the discussions forward. However, a report from the EU Council of Finance Ministers (ECOFIN), published in June 2023, noted that further discussions would be needed in order to find an acceptable compromise that limited the administrative burdens for both taxpayers and tax administrations. Delegations stressed the interlinkages between different parts of the directive, in that an orientation chosen in one part of the text might influence the solution in other parts.
The directive was removed from the agenda of ECOFIN’s May 2023 meeting but was revived in July 2023 with the aim of reaching political alignment at the November 2023 ECOFIN meeting. However, the published agenda for that meeting does not contain any reference to the draft directive.
Earlier this year, the European Parliament made agreement more difficult by approving amendments to the draft that would widen its scope to many more companies. The only exemptions in the current draft text are for listed companies, regulated financial entities and entities with at least ten full-time employees, according to UK law firm Macfarlanes. ‘We expect a lot more companies than had previously been the case to be within the scope of the rules – if and when they are introduced’, it said.
However, the minimum substance levels now being specified are less strict than was previously the case. They demand a single director resident in the territory, who is not a director of more than four entities that are not associated. The requirement to have the company’s own premises in the relevant jurisdiction remains, but now allows those premises to be shared with associated entities. The requirement to open and maintain a bank account in a Member State has been softened to become an alternative criterion.
‘It remains unclear whether these amendments will make the final cut,’ said the firm. Political negotiations continue, with ECOFIN still trying to broker an agreement.